How to Audit Accounts Payable: A Bookkeeper's Working Guide

Accounts payable is where a clean set of books most often proves itself. Every balance on the AP ledger should trace to a supplier statement, an invoice you can produce, and a payment you can explain. In this guide we set out how we review AP as part of the close, and what evidence a proper AP audit leaves behind.

What does an AP audit actually test?

An AP audit asks three questions. First, does the balance agree to the sub-ledger and the general ledger? Second, does each balance trace to real, unpaid supplier obligations? Third, is the cut-off right, so that goods and services received before period end are recorded in that period whether or not an invoice has arrived?

The first question is arithmetic. The second is evidence. The third is judgement, and it is where most findings live.

Start with the reconciliation

Before testing anything, confirm the aged payables report ties to the AP control account in the general ledger. If it does not, stop and find the difference first. Testing balances against an unreconciled sub-ledger wastes effort and hides the very errors you are looking for.

Common causes are journal entries posted directly to the control account, bills entered without a supplier, or a payment applied to the wrong vendor. Each of these is an ordinary posting mistake, and fixing them is bookkeeping, not investigation.

Trace a sample of balances to source documents

Select a sample of supplier balances from the aged report, weighted toward the largest and oldest items. For each, pull the invoice, confirm the supplier details, check the arithmetic, and confirm the goods or services were actually received.

Then match the balance to the supplier's own statement where one is available. A supplier statement is independent evidence. It is the single most useful document in AP testing, and reconciling to statements monthly is cheaper than sampling at year end.

Test the cut-off

Cut-off errors move expense between periods. Review the last invoices recorded in the period and the first ones recorded after it. Check the receiving dates, not the invoice dates. Goods received before period end belong in that period, with an accrual if the invoice has not arrived.

Work the other direction too. An invoice dated before period end but received after it should not be in the earlier period unless the goods were also received then. Look for invoices recorded in the final days that are unusually large, round-numbered, or addressed to a period already closed.

Look for the signs that are not mistakes

Most AP errors are honest. A few patterns deserve more attention, and knowing the difference matters.

Watch for suppliers with no physical address or contact details, invoices that bypass the normal approval route, duplicate invoice numbers under slightly different supplier names, and payments to bank details that changed recently. Also review debit balances in AP: supplier debits are usually prepayments or unapplied credits, and they belong on the balance sheet as assets, not netted silently against other payables.

None of these proves anything on its own. They are reasons to ask for evidence, not conclusions.

What evidence should the audit leave behind?

Keep the aged report as at period end, the reconciliation to the control account, the sample listing with tick-marks tying each item to its invoice, supplier statement reconciliations, and a short memo on the cut-off review. File it with the working papers for the period.

This is the paper trail that lets an external reviewer, or your future self, re-perform the work without starting over.

How does this fit into the close?

AP testing is not a separate event bolted onto the year end. Statement reconciliations belong in the monthly close. Cut-off review belongs there too, focused on the final week of each month. Done that way, the year-end audit is a summary of work already performed, not a scramble.

If the ledger will not reconcile, or the sub-ledger and control account disagree by an amount you cannot explain, that is the point to stop and get help rather than adjust the difference away.